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TMI Blog2008 (1) TMI 386X X X X Extracts X X X X X X X X Extracts X X X X ..... ved for the two assessment years, namely, the assessment years 1978-79 and 1979-80: "For the assessment year 1978-79: Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs. 32,50,557 assessed by the Income-tax Officer as the assessee's income observing that the assessee had acquired going concern and had transferred the same within a period of 4 months and the profit arising on the reduction of liabilities was thus trading profit which is liable to be taxed as business income? For the assessment year 1979-80: Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs. 24,59,188 assessed by the Income-tax Officer as the assessee's income observing that the assessee had acquired going concern and had transferred the same within a period of 4 months and the profit arising on the reduction of liabilities was thus trading profit which is liable to be taxed as business income?" 5. Heard Mr. B. D. Karia, learned advocate for the assessee and Mr. M. R. Bhatt, learned senior standing counsel for the Revenue. 6. In relation to the question referred at the instance of the assessee it is an accepted position between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability as on 30th June 1977 (Rs.) Commutation charges at the discounting rate of 12 per cent. (Rs.) Amount payable in lump sum on demand (Rs.) Kailash Inv. Pvt. Ltd. 64,42,365.00 12,01,782.47 50,40,592.53 Dhaulagiri Inv Pvt. Ltd. 12,15,000.00 2,33,924.17 9,81,075.83 Malbar Inv. P. Ltd. 31,21,875.00 6,01,055.11 25,20,819.89 Nilgiri Inv. 62,92,365.00 12,12,815.69 50,78,549.31 Total 1,68,71,605.00 32,50,577.44 1,36,21,027.56 The Commissioner of Income-tax (Appeals) held that the amount in question was not chargeable to tax under section 41(1) as it did not represent a remission of a trading liability within the meaning of section 41(1) of the Act particularly when no allowance or deduction had been made in the assessment of the assessee for any of the earlier years in respect of any loss, expenditure or the said liability and hence the pre-requisites for invoking section 41(1) were absent. He further held that the amount was not liable to tax as short-term capital gain because the conditions under section 45 were not satisfied inasmuch as the said liability was not capital asset and further at the time of commutation. The Commissioner of Income-tax (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Tribunal had also failed to take into consideration that the memorandum and articles of association of the assessee-company permitted purchase and sale of industrial units and, therefore also, the Revenue had rightly treated the transaction in question as business. In support of the submissions made Mr. Bhatt placed reliance on the following two decisions: (i) CIT v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC); and (ii) Protos Engineer Co. P. Ltd. v. CIT [1995] 211 ITR 919 (Bom). 9. As against that resisting the submissions made on behalf of the Revenue, Mr. Karia, learned advocate, pointed out that the findings recorded by the Tribunal were primarily based on facts of the case and in fact there was no question of law as such. That in any view of the matter, even if the findings of the Tribunal gave rise to mixed question of law and facts, the findings recorded by the Tribunal were in consonance with the legal position and no interference was warranted. Lastly, it was submitted that the assessee-company was required to make payment to four investment companies towards acquisition of four divisions and in case of one of the recipient companies, i.e., K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year is 1978-79 and the relevant accounting period is the year ended on September 30, 1977. The assessee company, a wholly owned subsidiary company of Karamchand Premchand Pvt. Ltd. (KPPL) had issued share capital divided into 1,11,000 shares of face value of Rs.100 per share. KPPL was holding 1,10,998 equity shares, while remaining 2 shares were held by nominees of KPPL. It appears that first and final call of Rs. 90 per share was due from KPPL on July 27, 1973. The board of directors of the assessee-company, therefore, resolved to call upon KPPL to make payment of Rs. 90 per share towards first and final call on or before August 11, 1973. KPPL, in its turn, having sold some of its industrial undertakings to another wholly owned subsidiary company, Sarabhai Chemicals Pvt. Ltd. (SCPL), was entitled to recover a sum of more than Rs. 3.95 crores from SCPL over a period of eight years from July 1, 1974, onwards, the last instalment being receivable on july 1, 1981. KPPL, therefore, after obtaining the consent of SCPL, proposed to the assessee-company to transfer and assign a sum of Rs. 99,89,820 from the aforesaid receivable amount from SCPL to the assessee-company. The b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e period, but the nature of payment remained the same, namely, call moneys payable towards shares issued by the assessee-company. Once this position is clear, it is apparent that the amount that the assessee-company was to receive is towards share capital and would be its liability." 13. In the light of the aforesaid position of law as enunciated by this court, the findings recorded by the Tribunal are required to be appreciated. The Tribunal has found that the difference between the total amount payable in five annual equal instalments and the total amount payable on demand represented reduction in the capital liability. The reduced amount represented the present value of the original liabilities which were payable in instalments in future, at the discounting rate of 12 per cent. The Tribunal thereafter records that such commutation of liabilities which were to be discharged at a future point of time did not have characteristic of income but was merely an unpaid purchase price, which was never claimed as an allowance or deduction in the assessment of the assessee for any of the prior years. The Tribunal, therefore, states that in no circumstances such commutation charges can be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions had to be given effect to. In paragraph 29 of the order of the Tribunal the documentary evidence on which reliance has been placed has also been noted and appreciated by the Tribunal. It is on a cumulative effect of the aforesaid findings of the Tribunal that the Tribunal has come to the conclusion that the reduction in liability by way of commutation did not result in any profit under section 28 of the Act. 14. In the light of the aforesaid findings of fact recorded by the Tribunal, after appreciation of evidence on record, and considering the law laid down by this court in the case of Kailash Investments P. Ltd. [2006] 281 ITR 92 it is not possible to find any infirmity in the order of the Tribunal so as to warrant any different view of the matter. If, as held by this court, in the case of Kailash Investments P. Ltd. [2006] 281 ITR 92 a debt due to Kailash Investments Pvt. Ltd. on capital account (towards call monies due from a shareholder) could not be regarded as either business loss admissible under section 28 of the Act, or a deduction admissible under section 57(iii) of the Act, or a business expenditure deductible under section 37 of the Act, the very same amount w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o issue shares of the assessee-company to the partners of the firm in lieu of the said credit balance as per the resolution of the board of directors of the assessee-company passed on April 21, 1954. However, the shares were not issued and on June 22, 1970, the board of directors of the assessee-company resolved that the aforesaid credit balance be transferred to the profit and loss appropriation account. Later on, on the advice of the auditors of the assessee-company, by another resolution, the board of directors of the assessee-company resolved that the aforesaid credit balance which was transferred to the profit and loss appropriation account be transferred to capital reserve account. The question which arose before the Income-tax Officer in the course of assessment proceedings for the assessment year1971-72, the year under consideration, was whether the amount of Rs. 3,82,905 which was transferred to capital reserve account was a revenue receipt in the hands of the assessee-company. The contention of the assessee-company was that the amount presented the outstanding credit balance in the current account of the firm and was not a revenue receipt. The Income-tax Officer, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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